To The Moon

Investment Thesis

In this article I will evaluate Intel’s (NASDAQ:INTC) near-term execution, which has been unsatisfactory. While the initial momentum of the Pat Gelsinger CEO transition started promising, there have just been a few too many letdowns in 2022 that Intel needsto address quickly.

More to the point, one of Pat Gelsinger’s mantras was that Intel would do what it said it would do, and then some. Well, I will be evaluating several of the things Intel said it would do, and it turned out that Intel didn’t fulfill those promises. Since Pat Gelsinger has described himself as a very data-driven person, it should hence be fair to conclude based on the 2022 track record that Intel still has not fully earned back investor trust, as obviously these hiccups cannot be ignored.

So while Intel may look very compelling, trading at or near multi-year low prices, investors should acknowledge that the risks have not fully been resolved yet. This means that for the time being investors are still buying promises rather than actual results.

Investor Meeting scorecard

The slide below is the moneyshot of this article. It shows the data points of what Intel early this year said it would do in 2022, evaluated at the end of 2022 to see how Intel actually fared. Clearly, Intel does not have great scorecard.

Intel

1. Alchemist

Admittedly, some of these points may be up for some debate, as Alchemist was indeed shipping or close to shipping already at the time of February’s Investor Meeting. However, undeniably one must acknowledge that Alchemist has been delayed. The roadmap was laptop in Q1, desktop in Q2 and workstation in Q3. While technically there was a very limited laptop launch on literally the very last day of Q1, desktop Alchemist only launched in October, two quarters behind schedule. In addition, Intel already said in July that it wouldn’t meet its goal of shipping 4M units in 2022, along with acknowledging the driver (software) issues that prevented the cards from delivering their expected performance in-game.

2. Sapphire Rapids

Equally, one could argue that Intel indeed started shipping Sapphire Rapids in Q1 just as Intel said it would. However, again this is misleading, since it turned out the actual volume SKUs were delayed, as Intel has widely discussed on the earnings calls. Bottom line, the actual launch event for Sapphire Rapids is set for January 10, 2023, nearly a year behind schedule (and nearly two years according to even earlier roadmaps).

What this means is that a bit over a year ago, already before the latest delays, Pat Gelsinger acknowledged that regarding data center leadership it would be “nip and tuck” against AMD (AMD) for the next few years. If Sapphire Rapids had a least launched in 2022, it would still have been a leadership product for a few years, but given the delay, AMD has already launched its “tuck” product before Intel’s “nip”. This means that regarding data center leadership, which Intel lost in 2019, it will only be in 2024 that Intel will finally regain this position again for the very first time, and only then likely only for a few quarters at best before AMD’s “tuck”:AMD Vs. Intel: I Was Wrong About AMD (NASDAQ:AMD).

3. Ponte Vecchio

I was a bit surprised to see Ponte Vecchio in H1 on this slide, as I had been under the assumption that it was targeted for H2. My guess is that H1 was for shipments for the Aurora exascale supercomputer, with a general launch in H2.

In any case, it turned out Intel met neither of these schedules, as the general launch of Ponte Vecchio has been postponed to January, although Intel is currently shipping Ponte Vecchio to the Aurora supercomputer (but also six months behind schedule, never mind the original schedule which had Aurora planned for Q4’21 or Q1’22).

What this means, competitively, is that Intel’s GPU effort is enduring similar issues, against Nvidia (NVDA), as just discussed on the data center Xeon CPU side: Ponte Vecchio was supposed to be Intel’s competitor against Nvidia’s Hopper H100, but with a year earlier time to market due to the chiplet-based design. However, H100 has already started shipping, which means Intel is again running behind.

One difference is that Intel is starting from 0% market share (although it once had a decently successful Xeon Phi supercomputing business. Also important for investors, Intel has long touted its open oneAPI initiative against the closed CUDA ecosystem, and Intel has developed a code migration tool, so in principle software shouldn’t be a too major issue for its adoption. It is likely that the $10B revenue plan for AXG (by 2026) includes quite a bit of revenue from this product line, but obviously Nvidia bulls in particular would likely argue that Nvidia’s stronghold won’t be taken over that easily (although as noted in the HPC space Intel once had a decent competitor with Xeon Phi).

TOP500

4. Tower acquisition

The acquisition is currently scheduled to close in Q1 2023, more or less on schedule, but technically it shouldn’t have been on the 2022 “bingo card” since Tower is currently still an independent company.

Nevertheless, I remain reasonably excited about acquisition given that it catapults Intel into a full portfolio foundry business. Although a GlobalFoundries (GF) acquisition might have been more compelling given its existing scale, it will be interesting to see if Intel can transform the Tower business from a low-margin and relatively small player in this space, to a more substantial competitor. On the other hand, as Intel said Tower is adding thousands of foundry employees to the nascent IFS business.

5. Robotaxi

This is another major item given its potential to become a multi-billion dollar business. In April, Pat Gelsinger said: “Mobileye expects to launch its commercial robotaxi services in Munich and Tel Aviv by the end of 2022.” About a year ago, and since around 2018 or so, the timeline had been to launch the robotaxi business in early 2022 and then scale this to many global locations through 2022 and 2023 (and beyond).

Clearly, the robotaxi business is also having some hiccups. Nevertheless, in the comments early this year it seemed that the robotaxi was actually ready for launch, only waiting for regulatory approval to remove the driver. However, since then, Intel hasn’t said literally anything about these plans, so it is unknown what the status currently is. In that sense, the recent Mobileye IPO, while more or less on schedule (it was actually delayed from mid-2022), might be seen as mostly smoke and mirrors to distract from the real value generator.

Highlights

One should nevertheless acknowledge that a few targets were met.

First, both Alder Lake and Raptor Lake have launched as intended. Although for Raptor Lake Intel had previously said it would also launch the laptop CPUs in 2022, at the time of writing there being no indication that this will still happen.

Secondly, on the manufacturing side Intel started working on the Ohio fab, announced the E.U. location, the CHIPS Act was passed and Intel announced the Brookfield SCIP program. In addition, Intel is spending, per its guidance, some $25B GAAP net capex in 2022 (although down a few billion from the initial guide), of which an impressive nearly $7.5B is geared towards Technology Development (as opposed to fab space or tools). As a side note, asdiscussed extensively before, these costs will come down significantly starting next year, which is one the levers for Intel to manage the FCF.

Thirdly, on the process technology side, Intel 4 indeed seems to be ready in H2’22 (even if it is late Q4), although Intel may have been a bit misleading since the Intel 4 volume product, Meteor Lake, now seems scheduled for the second (instead of first) half of 2023, which means the volume ramp will really happen only through 2023 (with higher volume obviously weighted towards the second half and into 2024). In addition, Intel has taped-in and taped-out Granite Rapids (and likely Sierra Forest as well) on Intel 3, which is running multiple OSes in the lab, purportedly with healthy yield. Lastly, on Intel 20A and 18A, Intel has started to run its own and internal test chips in the fabs, also seemingly on schedule.

Lastly, while it is not sure if this is the announcement Intel intended on the slide, Intel did announce Nvidia (NVDA) as a new member of the RAMP-C program, which may be a step towards its use of IFS.

Investor Takeaway

It was exciting that Pat Gelsinger wanted to bring back a culture where the company would do what it said it would do. However, the scorecard for 2022 unfortunately does not stack up. Combined with the worsening financial as well as stock performance, it has been a true annus horribilis for Intel.

It gets even bleaker when realizing that the plan under former CEO Bob Swan had been for 2022 to become Intel’s annus mirabilis instead (7nm ramp to at least temporarily regain process leadership, Granite Rapids to regain unquestioned data center leadership, Meteor Lake groundbreaking disaggregated design, Ponte Vecchio to dethrone Nvidia in graphics and AI, and the launch of robotaxi).

Of course, it had been known for quite some already that none of those original 2022 plans would materialize, so Pat Gelginger was timely brought in almost two years ago to set a new course for the ship, which as we’ve seen includes the two full process nodes in just two years (Intel 4 in 2023, Intel 20A in 2024) as well the start of a first-class foundry business.

Fortunately for investors, they can find some solace in knowing that the items most impacted by the delays were already well in-flight when Pat Gelsinger joined. Intel added around 20k net new employees over the last two years (the impact of the reorganization remains unknown currently), and those new teams that have been assembled or increased in size are likely working on brand-new projects that will materialize no earlier than 2025.

It are these projects that do not seem to be impacted by any issues (yet), most notably the plan to recapture process leadership in 2025 with 18A, and use this to build a big foundry business. So while 2022 has been an annus horribilis for Intel, given that some of the newer projects have already been underway for a years now, we can already see some initial progress of Intel’s recovery plan, with the process roadmap still on track, as evidenced by the first internal and foundry test chips being in the fabs currently.

Put differently, earlier this year I argued 2022 would mark the technological, financial and stock bottom. Although in recent coverage I have cautioned that it could perhaps be a two-year bottom, it likely cannot get much worse than it currently is, especially given the really promising products and technology on the horizon over the next few years.

Ultimately, this means that 2022/2023 remain on track to be the bottom, and not just the first few years in a long road to irrelevancy. Investors who can see the difference between both scenarios could make compelling alpha with the stock.